Which Taxpayers are Subject to the BIR Audit Program?

The previous BIR Audit Program makes a taxpayer undergo only one tax investigation in one year by the Bureau of Internal Revenue. But from the BIR’s new Audit Program under Revenue Memorandum Order (RMO) 19-2015, a taxpayer could now be investigated up to three times in the same year. These three investigations may be under normal tax audit, value-added tax, or Letter of Notice audit.

In case a taxpayer who was subjected to tax audit for two successive years is subject to tax audit on the third year, the Revenue District Officer, LTD or LTAD shall submit a written explanation to the Commissioner, copy furnished the DCIR-OG for Regional cases, as to why such taxpayer shall be subjected to audit for three (3) succeeding years, unless the RDO/LTD/LTAD has established that such taxpayer has an under-declaration of sales/income or overstatement of expenses/deductions by at least 30% (prima facie evidence of fraud).

Also, tax examiners are now required to investigate taxpayers who have not been audited but have been in operation for more than three years up to five years.

Though all taxpayers are considered possible candidates for audit, here are different kinds of cases which are covered by the new BIR audit program:

I. Mandatory cases
1. Taxpayers with claims for income tax refund or issuance of tax credit certificate 2. Taxpayers with claims for Value-Added Tax (VAT) refund/credit
3. Claims for tax refund/credit of excise tax under Title VI of the Tax Code, as amended, regardless of amount
4. Claims for tax refund/credit on erroneous/double payment of taxes, regardless of amount
5. Request for tax clearance of taxpayers due to retirement/cessation of business with gross sales/receipts exceeding P 1,000,000.00 or gross assets exceeding P 3,000,000.00
6. Request for tax clearance of taxpayers undergoing merger/consolidation/split up/spin-off and other types of corporate reorganizations
7. Cases with unresolved Letter Notices (LNs)
8. Estate tax returns with other tax liabilities
9. Policy cases covered by written directive of the Commissioner

In addition, here are the criteria to follow in auditing tax returns under the new BIR audit program:

1. Taxpayers mandatorily covered to file their returns using eFPS or eBIRForms under existing revenue issuances but failed to use the same
2. Taxpayers maintaining an ending inventory of 100% or more of their gross sales
3. Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting (BEPS), industry issues, etc.)
4. Taxpayers whose compliance is below the established benchmark rate
5. Taxpayers who have failed to comply with the submission of information returns required under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, SLS/P, eSales)
6. Taxpayers enjoying tax exemptions/incentives
7. Taxpayers which were placed under surveillance, Oplan Kandado and other enforcement programs of the Bureau
8. Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive years
9. Government agencies with validated “due to BIR” per COA report
10. LGUs engaged in proprietary activities or LGUs who fail to remit taxes withheld regularly
11. Taxpayers with income tax due of less than 2% of gross sales/revenues
12. Taxpayers with increase in assets of more than fifty percent (50%) from the previous year but with reported net loss
13. Taxpayers with claims for losses/damages due to natural calamities or those claiming inventory obsolescence
14. Taxpayer deriving its revenue/income exclusively or substantially from its parent company/ subsidiaries/ affiliates
15. Taxpayers claiming write-off of input tax as allowable deduction in its annual income tax returns
16. Taxpayers with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliates in a conglomerate
17. Professionals (e.g. lawyers, doctors, engineers, architects, CPAs, actors/actresses, media personalities, professional athletes, insurance agents, real estate service practitioners, event planners, etc.) with low income and/or business tax
compliance
18. Real estate industry
19. Telecommunications industry (TELCOS)
20. Contractors of National Government Agencies (NGAs), Local Government Units (LGUs) and Government Controlled Corporations
21. Sellers of goods and services via e-commerce
22. Hospitals, Clinics, Medical/Dental Laboratories
23. Amusement/Entertainment/Event Centers
24. Advertising Agencies
25. Business Processing Outsourcing Companies
26. Insurance Companies
27. Restaurants/Fast Food Chains/Catering Services/Bars/Coffee Shops
28. Taxpayers with zero-rated sales
29. Taxpayers with intelligence information such as specific business knowledge, third-party data and publicly available information (e.g., from media press releases vs. actual revenue/tax declaration per return, etc.)

If you want to learn more about BIR Audit, join Mr. Ruperto Somera, former Director of Bureau of Internal Revenue, as he talks about “Top Secrets of Handling BIR Audit”. This event is set to happen on September 29, 2017, at the RCBC Plaza Makati.